I set up a Limited Liability Company (LLC) in South Carolina
more than 5 years ago. It is a single member LLC, meaning that I am the
only owner. My LLC has been very active and all the transactions flow
through its separate checking account. It has employees as well who do
various kinds of work including investments and farming.

It is my understanding an LLC conveys on its owner the same basic
"shield" against law suits seeking payment through personal assets as
does a corporation with the advantage that board meetings and
paperwork are reduced to near zero and the LLC is reported on an
individual's 1040 tax return as though the individual and the LLC were
one person (no extra, separate return to file). I think, but am not
certain, a single member LLC is just an old fashioned sole
proprietorship in fancy new clothes and a new name but perhaps with
the crucial advantage of a "corporate shield".

My question: is an LLC really an effective shield against personal
lawsuits so that an individual could transfer all or part of his
assets into an LLC with the reasonable expectation that these assets
could not be attached by a court having jurisdiction? The
circumstances are that I have has no current lawsuits, no threatened
lawsuits, no debts and no anticipated claims so there is no possible
claim of fraudulent conveyance.

I am not asking for a legal opinion. I am, in fact, a licensed
attorney, but am not currently active in the legal field. What I am
looking for is a review of the South Carolina statutes (including any
explanatory comments attached to or contained in the legislative
records associated with the passing of the statute) and a summary of
any relevant case law and a discussion of these. South Carolina's LLC
statutes are probably similar and modeled after the state laws of many
other states, but my primary interest is South Carolina since I and my
LLC are both legal residents of South Carolina. In addition, there may
be practical ways to implement the movement of funds to the LLC and to
operate in a way that enhances asset protection.

Hello, Jack64!

Let me start with the necessary disclaimers:  As you know, this is not
legal advice.  Although we researchers make every effort to be as
thorough and accurate as possible, we are no substitute for trained
lawyers.

That said, I am a lawyer (although not practicing at the moment), and
I have consierable experience with LLC's.  Your instincts are mostly
correct:  an LLC does indeed provide the same liability protection as
a corporation does.  It is not, however, necessarily a "sole
proprietorship."  Many LLC's have multiple "members."

"A limited liability company is a hybrid business entity that combines
aspects of both a partnership and a corporation. It is formed under
the Corporations Code and consists of 'members' who own membership
interests. Members may be individuals, corporations, partnerships, or
other limited liability companies. The company has a legal existence
separate from its members. It provides members with limited liability
to the same extent enjoyed by corporate shareholders, yet allows
members to actively participate in management and control.  The
general rule for limited liability companies is nonliability for the
individual members of the limited liability company for judgments for
the debts or obligations of the company."
--from the California case of _Warburton/Buttner v. Superior Court_
(2002) 103 Cal.App.4th 1170, 1187-88, internal quotations and
citations omitted.

South Carolina law is similar to the law in California, and in fact
similar to the law of all 50 states.  The South Carolina Uniform
Limited Liability Company Act of 1996 can be found at
http://www.scstatehouse.net/code/t33c044.htm.

It provides, in relevant part, that "the debts, obligations, and
liabilities of a limited liability company, whether arising in
contract, tort, or otherwise, are solely the debts, obligations, and
liabilities of the company. A member or manager is not personally
liable for a debt, obligation, or liability of the company solely by
reason of being or acting as a member or manager."  (Section
33-44-303(a).)

It goes on to provide that mere informality in conducting the business
is not grounds for "piercing the veil" and imposing personal
liability.

"The failure of a limited liability company to observe the usual
company formalities or requirements relating to the exercise of its
company powers or management of its business is not a ground for
imposing personal liability on the members or managers for liabilities
of the company."  (Section 33-44-303(b).)

Using a Lexis search, I was unable to find any cases in South Carolina
that imposed personal liability on LLC members, or alternatively,
invaded LLC assets to pay for the liability of individual members. 
There are cases from other jurisdictions, however, and the law is
fairly uniform across different jurisdictions.

All of the cases apply the same standard for both direct "piercing"
(applying personal assets to corporate debts) and inverse "piercing"
(applying corporate assets to personal debts) as is applicable to
corporations.

For example, in Connecticut, a creditor was successful in "piercing
the veil" against an LLC member who had commingled funds, exercised
total control over the business such that it was indistinguishable
from her personal affairs, AND had done so with knowledge of the
plaintiff's claim in an apparent attempt to defraud creditors.

The court applied a two-part test.  First, it evaluated the
defendant's "control" over the entity in question:  "Control, not mere
majority or complete stock control, but complete domination, not only
of finances but of policy and business practice in respect to the
transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its
own."

Control by itself, however, is not enough.  The control "must have
been used by the defendant to commit fraud or wrong, to perpetrate the
violation of a statutory  or other positive legal duty, or a dishonest
or unjust act in contravention of plaintiff's legal rights," and must
"proximately cause the injury or unjust loss complained of."
Campisano v. Nardi, 212 Conn. 282, 291-92, 562 A.2d 1 (1989).

By contrast, where there has been no commingling, where the corporate
forms have been (mostly) respected, and where there is no evidence of
intent to defraud, the separate identity of the LLC is protected.
_Bonner v. Brunson_ (2003) 262 Ga. App. 521;585 S.E.2d 917
http://www.lexisone.com/lx1/caselaw/freecaselaw?action=FCLRetrieveCaseDetail&caseID=40&format=FULL&resultHandle=1ce31584ce9388d84051e2380f3c70c2&pageLimit=10&xmlgTotalCount=81&combinedSearchTerm=%22limited+liability+company%22+and+%22alter+ego%22&juriName=Combined%20States%20Cases&sourceFile=STATES;COURTS

As far as "practical ways to implement the transfer," those are
implicit in the cases discussed above.  Respect the separateness of
the legal entity.  If you transfer property to the entity, create a
formal contract doing so.  Spell out the rights and obligations of
each party to the contract as though each is a separate person. 
Maintain separate funds.  DO NOT pay for personal expenses with LLC
funds directly.  If LLC funds are to be used for your expenses, pay
funds to yourself as part of a salary.  Likewise, DO NOT pay LLC
expenses directly.  If you must furnish funds to the LLC, reflect that
as a "capitalization" or "investment."  In the future, be mindful of
the entity's solvency and your own -- you are already aware of the
issues that arise when an insolvent person, or one who faces claims,
transfers property to shield it from creditors.

Interesting article on Limited Liability Partnerships (LLPs) and
Limited Liability Companies (LLCs):
LLPs: How Limited is Limited Liability?
By Carol J. Miller
http://www.mobar.org/journal/1997/mayjun/llc.htm

I hope this answers all your questions.  If any of it is incomplete,
or requires further explanation, please don't hesitate to ask.

---

Clarification of Answer by hagan-ga on 01 Jul 2005 13:50 PDT

I just reviewed my notes, and realized there were a couple of
references I neglected to include.

Specific language from the Brunson case:
"A court may disregard the separate LLC entity and the protective veil
it provides to an individual member of the LLC when that member, in
order to defeat justice or perpetrate fraud, conducts his personal and
LLC business as if they were one by commingling the two on an
interchangeable or joint basis or confusing otherwise separate
properties, records, or control. _Stewart Bros., Inc. v. Allen_, 189
Ga. App. 816 (377 S.E.2d 724) (1989)"

"In order to pierce this veil and hold Brunson personally liable for
the alleged debt of the LLC, there must be evidence that he abused the
forms by which the LLC was maintained as a separate legal entity apart
from his personal business. Fuda v. Kroen, 204 Ga. App. 836, 837 (420
S.E.2d 767) (1992)."

Further reference articles:
http://www.nolo.com/article.cfm/ObjectID/D7043E4E-91CB-4B29-B8DC0DDA10AD4B3B/catID/BAAE1B67-F54A-41B4-91943A51F56C3F79/111/182/245/ART/

http://www.allbusiness.com/forms/llcforms/316.html

---

Request for Answer Clarification by jack64-ga on 02 Jul 2005 02:16 PDT

Hi Hagan-ga,

Your answer provides the basic information I need but it would be more
valuable to me and I would rate it 5 star and add a substantial tip if
you could more thoroughly address how to achieve the point made in the
last sentence of my question: "practical ways to implement the
movement of funds to the LLC and to operate in a way that enhances
asset protection".

For example, now about 1 percent of my assets are under the "umbrella"
of the LLC and the rest are in my name personally. What if I were
change the ownership name of about 50 percent of my assets to the name
of the LLC? These assets are primarily US Treasury Bonds so such a
change would be very easy and just involve setting up a new account
with the Treasury and a new checking account for LLC Treasury funds. I
would then keep the personal and LLC accounts separate and not
co-mingle funds. My legitimate business reason for such a structure is
not just protection from lawsuits (non of which are a present concern)
but also if hackers or other criminals were to penetrate one of my
accounts it is unlikely with different names and account numbers that
they could penetrate both. However, the amount of money in the LLC
Treasury account would then far exceed the amount reasonably necessary
to operate the LLC from a business point of view. Maybe this is not
important. Perhaps the primary "business" of the LLC would then be
investing in US Treasurys and segregating my assets and protecting
them in a manner that makes it difficult for a personal contemplating
fraud to attack all assets at once.

I know that for tax personal the IRS considers the single member LLC
and me as individual the same person so that it is very unlikely that
such a change in the ownership name would have negative tax
consequences (such as being considered a dividend or gift), although
all this will be reviewed by both my accountant and legal consul. 
Your role is to prepare me for my meetings and discussion with my
advisors such that I will be able to present them with a specific
strategy for their review. Typically neither lawyers or accountants
are good at preparing business strategies, first, because they are not
businessmen and, second, because if they create the strategy they
might be viewed as responsible if it failed. Their best role often is
telling you why you cannot do something or what the negative
consequences are likely to be.

If you are able to expand on your answer as outlined above I will be
very pleased. If not, I will accept your answer as it is.

---

Clarification of Answer by hagan-ga on 02 Jul 2005 05:00 PDT

Hello!
Of course, I'm happy to provide any further information you need. 
This will require a bit more research, that I won't be able to get to
until this afternoon, but you should have it by tomorrow.
Cheers!

---

Clarification of Answer by hagan-ga on 02 Jul 2005 10:00 PDT

Hello again Jack!
I think I have a better handle on what you need now, so let's take a
swing at this.  If I'm still short of the mark, let me know.

I have located a number of articles discussing asset protection
strategies using LLCs.  Some of the following discussion will rely on
those articles.  Some will be the result of my own experience -- 11
years practicing law, including representing creditors and debtors,
and being myself involved in several different LLCs.

Depending on the kind of property we're talking about, a single LLC
might not be the best strategy for you.  You mention that the assets
already IN the LLC are Treasury bonds.  Those are so-called "safe"
assets, meaning that in and of themselves, they will not expose you to
a risk of liability.  "Dangerous" assets are things like real
property, or a business -- owning them exposes you to a risk of
lawsuit.

This is an interesting article targeted at physicians, but still
relevant for the points it makes:
http://www.mdng.com/departments/mar_apr2004/assets.htm
It suggests putting ?dangerous assets? ? those likely to produce
lawsuits ? into one or more LLCs, and ?safe assets? into a Family
Limited Partnership.
It also notes that an LLC CANNOT be used to protect the family home --
LLCs are not entitled to deductions for mortgage interest, or
exclusions of cap gains taxes.

The Law Offices of Robert J. Mintz maintains a web site --
http://www.rjmintz.com -- that includes a wealth of information about
estate planning and asset protection strategies.  According to the
site, Mr. Mintz has 20 years' experience in the subject, and "has
written extensively and taught in the areas of asset protection, tax
and estate planning."

His page on LLCs as an asset protection strategy appears at: 
http://www.rjmintz.com/appch6.html

and specifically, at
http://www.rjmintz.com/familysavingsllc-example.html, he makes the
same point about "dangerous assets:"

?Also, if investment real estate is owned, these properties should be
placed in separate LLC's. A Dangerous Asset such as real estate, which
creates significant potential liability should not be placed in the
same LLC with your financial assets.?

Mr. Mintz also suggests using a Family Trust to further insulate the
LLC from the member.  He suggests putting the assets themselves into
LLCs -- separating dangerous assets from financial assets -- and then
having a Family Trust hold 100% of the membership interest in the
LLCs.  This provides a level of anonymity that shields you from
fishing expeditions designed to discover the ownership of the asset.
http://www.rjmintz.com/privacytrust-plan2-example.html

You mention a specific concern about "overcapitalizing" the LLC with
more Treasury bonds than it needs to operate.  But as you note, there
is no barrier against an LLC having "holding Treasury bonds" as its
primary business.  When you set up the LLC, I assume you set it up to
"conduct any legal business," and not specifically for a narrowly
defined purpose.  If its originating documents state that it can carry
on any legal business in the State of South Carolina, then you should
be perfectly fine -- again, AS LONG AS you do not put "dangerous"
assets with the "safe" ones.

In terms of respecting corporate forms, and ensuring that you are two
separate "persons," there is nothing wrong with putting as many
Treasury bonds into the business as you like.

HOWEVER -- you also mention that the LLC has employees.  To my mind,
the existence of employees creates RISK.  Employees can sue for
harassment, wrongful termination, discrimination, defamation,
intentional infliction of emotional distress, willful misconduct,
fraud, deceit, breach of contract, breach of the covenant of good
faith and fair dealing, high tide, Thursday, wanton infliction of
sunrise, and the heartbreak of psoriasis.  If the LLC has employees, I
WOULD NOT put more Treasuries than you need into that LLC -- in fact,
I'm not sure I would put any in there at all.  Create a new one to
hold your financials.  Then keep them as separate as you keep each one
from yourself.  For this, I like Mintz's idea to hold the LLC
membership in a trust, further insulating you from scrutiny.

There is another issue that has to be discussed -- withdrawals.  The
whole point of having assets in the first place is to enjoy the fruits
of them.  If they're locked away inviolate in the LLC, you may as well
give them away to strangers.  So you need a strategy to disburse funds
to you from the LLCs without creating the appearance that the LLC is
just your personal checking account.

My earlier caution about solvency is critical here.  You have to be
very sure that the LLC NEVER becomes insolvent by any definition as a
result of disbursements to you.

This article:
http://www.fiducial.com/learning_centers/sbc/text/P12_7410.asp
discusses the different kind of distributions available, and strongly
recommends that disbursements be made on a regular schedule, as either
salary, loan payments, or lease payments, as opposed to a simple
distribution of earnings on account of ownership interest.  When the
LLC is paying you a salary, or paying back a loan, it is giving back
money for value received.  That kind of distribution is a lot harder
to use as evidence of your "complete control and domination" of the
LLC, as opposed to you pulling money out of the LLC just because
you're the owner and you can.  Make sure, if you want to use any of
the LLC assets, or any income derived from them, that you structure it
way ahead of time, that it is part of an overall value exchange
between you and the LLC, and that it does not leave the LLC insolvent.

Bottom line:  
Segregate your "safe" assets and your "dangerous" assets.
A business that is a going concern, that has employees (and customers?
 eek! even worse!) is a "dangerous" asset.
Real property is a "dangerous" asset, but remember that your home
cannot be held in the LLC.  Consider a family trust or Family Limited
Partnership for the home.
Consider a trust to hold the membership interest in the LLC.
Be careful with distributions of income or assets.

Thank you for the opportunity to add further value to my answer.  If
there's anything else you need, please let me know.

This answer provides exactly what I need to decide if an LLC would be
a good vehicle to make some of my assets "bullet proof". Now I can see
that the more protection I seek, the more limited I am in the range of
actions I can take with the funds and in how I deal with my own LLC.
Although I might like to have my cake and eat it too, the real world
seldoms provides something for nothing.

My current strategy of holding only safe assets, having no debt,
having a large umbrella liability insurance policy, having no business
partners or shareholders and having only 3 employees in my LLC, which
itself has limited assets, and, finally, of not hurting other people
may be best after all.

Oh, my.  Jack, you are too generous.  Thank you for the tip!!!

I have some observations from the standpoint of a California attorney
who practices in the area of business formation.  I always tell my
clients that and LLC and a corporation are equally good at asset
protection.  Administratively, I find there is very little difference
between administrative burden of running a single-member LLC vs. a
single-shareholder corporation.  However, most tax consultants I have
spoken with seem to favor doing business as a corporation.  With a
corporation, you take some of your income as shareholder dividends and
shelter some it it from SSI/Medicare taxes.  So tax planning should be
considered as well.  I find that most of my clients are better off as
an S corporation than an LLC.